Buying a Business in Connecticut: How to Avoid Assuming Tax Liability

Find out how to check for UCC liens and get a state-issued tax clearance letter in Connecticut.

If you are buying a business in Connecticut, you will want to obtain tax clearance from the state to make sure you are not taking on the seller’s outstanding tax liability. Buyers often assume that if they acquire a business through an asset purchase as opposed to a stock sale then they will not be responsible for any of the seller’s unpaid taxes. However, most states have successor liability rules that allow the transfer of certain tax liability to the buyer even in an asset purchase. Often this type of successor liability is limited to sales and use tax and other excise taxes that a seller collects on behalf of the state.

Obtaining a tax clearance letter from the state is important assurance for a buyer in an asset or a stock purchase that they are not taking on unpaid tax liabilities of the seller. In addition to obtaining tax clearance from the state, a buyer of a Connecticut business also should check state UCC records to make sure the business’s assets are not encumbered by any liens.

Tax Clearance Letter (Tax Clearance Certificate)

A tax clearance letter (known in Connecticut as a tax clearance certificate) states that no sales and use taxes, or admissions and dues tax, or both, are due from the seller. The certificate relieves the buyer from any related tax liability. That means that, unlike in other situations, the buyer does not need to withhold money from the purchase price of the business to cover cleared taxes. The certificate will either state that the buyer does not have any tax liability or that the buyer must withhold a certain amount from the purchase price to cover the seller’s unpaid taxes.

Tax clearance certificates are issued by the Connecticut Department of Revenue Services (DRS). Only the buyer of a business or a buyer’s authorized representative (“practitioner”) can request a certificate. There is no blank form to request a certificate. Requests must be in writing and include the following information:

the name and address of the buyer

the name and address of the practitioner representing the buyer, if applicable

the Connecticut Tax Registration Number assigned to the purchaser by DRS

the name and address of the business being sold as registered with DRS

the Connecticut Tax Registration Number of the business being sold

a letter signed in the original by the purchaser or its practitioner that clearly indicates the intent to purchase the business or stock of goods

a copy of the purchase agreement including all schedules, addenda, and attachments

the purchase price of the business

the expected closing date of the sale

the physical location where the purchaser will operate the business; and

a properly executed Form LGL-001, if the purchaser wants DRS to contact its practitioner.

You must submit your request for a certificate by registered or certified mail to the following address:

Department of Revenue Services

Audit Division – RCA Unit

Request for a Clearance Certificate

25 Sigourney St.

Hartford CT 06106

Hand-delivered, emailed, and faxed requests are not allowed. For more information, check the DRS website.

UCC Liens

If you are buying a Connecticut business, you’ll also want to make sure the assets you are acquiring are not subject to any liens. You can do this by checking the state’s public records for creditor financing statements. This gives you notice of what secured debt you’ll be acquiring (if any) related to the business’s equipment, inventory, and possibly other items. You will want to do this whether you are buying the business in an asset or stock purchase.

You can do a UCC inquiry on the Connecticut Secretary of State website to find out what creditor financing statements are on record. Be aware that basic online searches will show you only limited information. You will not see all information filed by the creditor. Connecticut’s UCC searches include federal tax lien information.

Other Debts

If you are buying a business, there are other possible kinds of business debt not covered here that you might want to investigate, particularly in a stock acquisition. This could include, for example, unpaid local taxes, guarantees, or other private contractual obligations.